The U.S. economy is set to grow by a robust 3.6% in 2006, but the Federal Reserve should increase interest rates, the OECD said May 23 while warning strongly about high deficits, deep trade imbalances and low savings.
The American economy weathered Hurricane Katrina and has absorbed oil price shocks but is now at risk of overheating, the Paris-based Organization for Economic Cooperation and Development signaled in its twice-yearly review of the world economy. "Monetary policy, currently near neutral, needs to tighten slightly to keep the economy in balance," the OECD said.
The report described current account imbalances in the U.S. -- which the OECD predicted could reach 7.5% of GDP in 2007 -- as "unsustainable", adding that "most observers agree that ... a rebalancing looks increasingly unavoidable".
Such a correction could entail a further depreciation of the already weakened dollar, possibly to the extent of one third to one half, the report said, citing estimates by non-OECD experts.
Copyright Agence France-Presse, 2006
